There is only so much central banks can do
Mohamed El-Erian
June 15, 2012
Judging from the growing number of official
remarks, central banks – in a standalone capacity and jointly – have been
discussing what to do in the event of major disruptions to the European payments
and settlement system. The immediate focus is, of course, Sunday’s highly uncertain election in Greece. But the contributing factors go
well beyond this as they are entwined in Europe’s increasingly messy debt and
banking circumstances.
.
In welcoming such signs of responsible contingency planning, it is important to distinguish between what central banks can deliver and what they are incapable of doing. In the context of today’s complex crisis in Europe, these critical institutions have essentially been reduced to the role of fire brigades.
In welcoming such signs of responsible contingency planning, it is important to distinguish between what central banks can deliver and what they are incapable of doing. In the context of today’s complex crisis in Europe, these critical institutions have essentially been reduced to the role of fire brigades.
They can try to reduce the risk of a fire and, should one
occur, stand ready to fight it and contain damage. But, acting on their own, they
are unable to alter materially the behaviour of those who place whole
neighbourhoods at risk.
.
Recent statements from a host of officials – including Mario Draghi, European Central Bank president, Mervyn King, Bank of England governor, and Timothy Geithner, US Treasury secretary – suggest this is indeed on the to-do list of major central banks. And the output, should it be necessary, would come in the form of both individual measures and globally co-ordinated ones.
.
While certainly willing and partially able, central banks have not been effective in severing the major “feedback loops” that erode on a daily basis the integrity of the eurozone, discourage private capital inflows and undermine the wellbeing of the global economy. Specifically, acting on their own, they do not have enough instruments to stop the bad interactions between weak banks and deteriorating sovereign creditworthiness. They have even fewer tools to stop individual country problems from contaminating what is an increasingly synchronised global slowdown. And they are powerless when it comes to breaking the adverse feedback loop between bad economics and bad politics.
.
This reality is yet another indication of the extent to which the west has become hostage to a never-ending series of emergency tactical responses when what is critically needed is also a set of coherent strategic decisions. This leaves central banks in the role of a consistently scrambling fire brigade. And the longer they are in this role, the greater the erosion in their effectiveness to deal with an ever increasing number of fire threats.
0 comments:
Publicar un comentario